Re: Electro-Optical
Electro-Optical: Halted by the SEC After 61 Days Daily commentary updated for March 18, 1998
The success of the stock market over the past ten years has brought small investors to the forefront of the investing world. Unfortunately, it has also brought new creative investment scams designed to part the small investor with their money.
According to a suit filed by the Securities Exchange Commission, (the SEC) on Friday, manipulation of stock in Electro-Optical Systems is the latest securities fraud.
Who is Electro-Optical Systems, (EOSC)? Although it has been trading on the OTC Bulletin Board only since December 19, 1997, it was halted on Friday for ten days by the SEC, after plunging 50% from its early February high.
So what happened? This is really a tale of three companies: Curbstone Acquisition, WTS Transnational, and Electro-Optical Systems.
The Curbstone Acquisition Corp. Story
To understand Electro-Optical Systems story, you first need to know about Curbstone Acquisition Corp. (CBSO). After all, the only SEC filings available are listed under this company name.
Here is a brief timeline illustrating the history of Curbstone Acquisition Corp. Bear with us, it is illustrative.
Curbstone Acquisition Corp, was founded in 1988 in Delaware, and issued 500,000 shares of its stock to the shareholders of TRIM-A-LAWN, in exchange for $1000 cash. We have been unable to determine who owned TRIM-A-LAWN, its business nature, or why Curbstone would do this, but it makes Curbstone's original share value $0.002 per share. Curbstone's stated business purpose at this time is "the subsequent search for, location of and combination of the Registrant with a privately-held business enterprise."
This search will apparently take the company nearly ten years, as it makes no acquisition until Dec. 18, 1997 (see below.)
In 1996, Curbstone lists its address as 3900 Paradise Road, Las Vegas, Nevada.
In 1997, Curbstone lists its address as 4180 La Jolla Village Drive, Suite 500, La Jolla, California.
Apparently, from founding through 1997, the company had no employees, property, or significant assets. Expenses of the company were paid by shareholders, and accounted for as additional paid-in-capital. The 10-K filed on May 9, 1997 states, "there have been no material changes in the financial condition of the Registrant since its inception, nor is a material change anticipated until the Registrant is able to identify and consummate a business combination."
Other expenses, such as legal, accounting, and consulting fees, were paid by issuing stock to the providers of those services.
In September 1996, the principals of Curbstone purchase 600,000 shares from the company for $12,000, or two cents a share. The money goes for expenses.
By the end of 1996, there are 3,521,876 shares in the hands of 425 shareholders. Who the heck are these people, and what are they doing with a company that doesn't do anything? Except issue stock.
We can only assume that during this time, having somehow become a publicly traded stock, Curbstone Acquisition was unable to find anyone to acquire.
Until December 1997.
The WTS Transnational Story
Enter WTS Transnational Inc., a privately held company with no revenues, but apparently with plans for a product that can automatically verify fingerprints, decides to "merge" with Curbstone.
Why would a company agree to be "acquired" by a public company with no assets, no book value, and no real market for its shares? First of all, WTS had little in the way of assets themselves.
According to the Curbstone 8-K financial statement filed December 23, 1997, WTS Transnational had no cash, accounts receivable of $10,000 and current liabilities of over $650,000 with a retained deficit (accumulated losses) of over $2 million.
WTS also listed no revenue for the previous nine months, (1/97 through 9/97). ( From the 8-K/A file February 23, 1998, it looks like WTS did have "consulting revenue" of over 2 million in 1994 and 1995, but none in 1996 or 1997.)
In addition, WTS Transnational's employee expenses for the nine months are listed as $31,000, barely enough for one full time person. Rent for nine months was $5,000 or $555 per month.
In addition, this frightening financial information comes with an accountant's disclaimer: "Management has elected to omit substantially all of the disclosures required by generally accepted accounting principles." The accountant also claims "We are not independent with respect to WTS TRANSNATIONAL, INC."
This is a picture of a seriously struggling company with essentially no activity for the past two years.
And suddenly someone shows up wanting to "acquire" them. As part of the merger, the new entity also received $850,000 from "certain investors" (unnamed in the 8-K/A) in exchange for 2,108,481 shares of stock ($0.40 a share).
Did the WTS principals view this merger as a way to keep their fingerprint verification product dreams alive?
Curbstone, which prior to the merger had just over 3 million shares, issued more than 15 million new shares to acquire WTS Transnational. (From an accounting perspective, the transaction is structured as a recapitalization of Curbstone, which technically means WTS is the acquirer.)
The Electro-Optical Systems Story
Upon the merger, Curbstone/WTS Transnational changed its name to Electro-Optical Systems Corp., changed its symbol to EOSC, and began trading. Curbstone had previously traded at $0.25 a share. Electro-Optical began trading at $5.00.
The day of the merger, the directors and officers of Curbstone resigned. Suddenly, they were private individuals, mere shareholders in Electro-Optical.
Who was buying and selling those first trades? The SEC alleges it was individuals related to the company, who first manipulated the stock supply and price by buying amongst themselves, and then, when a "price" was established, began selling shares to new investors. It names, among others, many of the former directors and officers of Curbstone.
The merger of these two basically non-functioning companies suddenly had a market capitalization of over $100 million dollars. With over 20 million shares outstanding trading at $5.00 per share, EOSC was a "big" company.
But not one nickel of revenue.
Then, on January 31, 1998, The Future Superstock, an Internet stock touting newsletter picks EOSC as "the one stock to take a SERIOUS look at." The Future Superstock readily acknowledges that it is compensated for its "research" at the bottom of every electronic issue.
The investment opportunity is presented by the Future Superstock as follows: a new company with a fingerprint verification system that is unprecedented in capabilities and price ($500) and potential revenue of $7.5 million from its first customer alone. (That would be 15,000 units, we guess.) The company has been working for seven years and is staffed by seasoned engineers, mostly with years of experience from the Honeywell Electro-Optical division. There is no mention of Curbstone or WTS Transnational. Sounds pretty good, doesn't it?
EOSC's price takes off. Volume jumps from 82,000 the day before the newsletter to over 2 million shares on Monday, February 2. Within a few days it reaches $7.00 per share.
But then it falls dramatically. Just look at this chart. As the new investors try to sell, they find few buyers. Over 500,000 shares trade at less than $3 per share on March 12.
Currently halted since Friday by the SEC, EOSC's last trade was at $3 5/8.
Does Electro-Optical really have a product? The most recently filed 8-K/A of February 23, 1997, states: "The Company has not completed the development of its products and has suffered recurring losses of approximately $744,000 since inception."
Electro-Optical's press release of March 17, 1998 states EOSC "has designed and sold a first generation system to a bona fide customer, and is in the process of developing its third generation system."
Our calls to Electro-Optical went unanswered. We sent one of our Boston office employees out to look for 20 Main Street, Acton, MA, their current headquarters. Although this address is an office building, there was no directory listing for Electro-Optical. We did however, find BBL Advertising, which is Electro-Optical's advertising agency.
The Next Chapter?
We will be watching Electro-Optical Systems closely when it resumes trading on March 26. The price of the next trade is anyone's guess. In just 61 trading days, nearly 15 million shares changed hands. How many shares now reside in the hands of small investors is unknown to anyone.
Except the SEC, who has the record of every single transaction.
Note: Briefing.com never has and does not accept compensation in exchange for analysis of a stock. Our analysis is entirely independent. No one at Briefing has any position of any kind in Electro-Optical Systems.
Note: All material information related to Curbstone Acquisition Corp., WTS Transnational, Inc., and Electro-Optical Systems Corp. was obtained from SEC filings made by Curbstone Acquisition Corp.
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SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16035 / January 21, 1999
SEC v. Cavanagh et al., 98 Civ. 1818 (S.D.N.Y) (DLC)
On January 7, 1999, United States District Court Judge Denise Cote issued an order requiring New Jersey securities lawyer William N. Levy to pay $1,292,000 into the Court?s registry pending trial on the merits of the Commission?s action, SEC v. Cavanagh et al. Levy consented to the order after the Commission discovered that Levy, whom the Commission has alleged participated in a scheme to manipulate the stock price of Electro Optical Systems, Inc. ("EOSC"), had failed to disclose in his court-ordered accounting that he had profited by over $560,000 by selling EOSC shares during the manipulation. Levy previously was enjoined in 1976 for violating the antifraud and registration provisions of the federal securities laws in SEC v. Management Dynamics, Inc., 73 Civ. 2642 (S.D.N.Y.), Lit. Release 7445 (June 16, 1976), a similar case involving the unregistered sale of securities and stock manipulation.
The $1,292,000 will bring the total deposited in the registry of the Court to nearly $2 million. In addition, approximately $6,000,000 is frozen in bank accounts in Spain and Switzerland pending disposition of the Commission?s case. Other funds traced to the defendants remain frozen in U.S. banks and brokerage accounts.
On March 13, 1998, the Commission filed its Complaint and obtained a temporary restraining order against Levy, Thomas Cavanagh, Frank Nicolois and 10 other defendants and 19 relief defendants by alleging violations of the antifraud and registration provisions of the federal securities laws in connection with the defendants scheme to manipulate EOSC?s stock price. The Complaint alleges that the defendants controlled the supply of EOSC stock, inflated EOSC?s share price from $.50 to over $5.00 in one day, and distributed false information about the company in press releases and Internet newsletters. As a result, the defendants reaped over $12,000,000 in profits by selling EOSC shares on the Internet, to primarily small, on-line investors.
On April 20, 1998, Judge Cote entered a preliminary injunction against the primary defendants pending trial on the merits. The 122-page District Court opinion stated that defendants Levy an Cavanagh "set in motion a plan . . . designed to line their pockets." In July 1998, the Commission amended its Complaint, adding four defendants and seven relief defendants. On September 2, 1998, the U. S. Court of Appeals for the Second Circuit upheld the District Court?s decision granting the preliminary injunction. 155 F.3d 129 (1998). In October 1998, the Commission?s case was partially stayed by the District Court at the request of the defendants in view of a criminal investigation by the United States Attorney?s Office for the Southern District of New York.
In addition to the funds frozen in the U.S. and abroad, to date, the Commission has recovered $2.3 million in disgorgement, interest and penalties from settling defendants, relief defendants and potential relief defendants. Two of the primary defendants, George Chachas and Maier Lehmann, have consented to the entry of injunctions alleging violations of the antifraud and registration provisions of the federal securities laws. Chachas paid $493,000 and Lehmann paid $630,000 in disgorgement and penalties.
Related Litigation Releases: No. 15669, March 13, 1998 No. 15715, April 21, 1998
sec.gov
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News and Updates of the Stock Detective Kind.
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Stock Detective Light - April 13, 1998...
Future SuperStock, EOSC & Barrow Street Securities - Without kicking a horse many wish was already dead, it is important to note that Stock Detective continues to follow the saga of Future SuperStock and the trail of Stinky Stocks it leaves in its wake. Among recent financial flotsam is a company calling itself Electro Optical (OTCBB: EOSC). Electro Optical was featured by Future SuperStock in January as its "Stock of the Year."
This hype came just weeks after EOSC had started trading. But within days of the FutureSuperStock's pump, more than 2.5 million shares of EOSC were trading daily. This despite the fact that between the two companies that merged to create EOSC, neither had a bucket or even a mop. Fortunately for investors ? well, some investors ? the SEC arrived early to the promoter party, pulling the plug on EOSC's trading 61 days after it started.
Another pseudo-research outfit, Barrow Street Research, had also recommended the stock. Both Barrow and Future SuperStock are on our list of paid promoters (http://www.financialweb.com/stockdetective/list.html) that try passing themselves off as objective analysts.
One reader recently alerted us to an excellent article on Briefing.com's website about the creative con behind EOSC (http://www.briefing.com/stkbrief/eosc.htm) and how two non-functioning companies merged to become one with a market capitalization of more than $100 million.
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